My Account Is Now Gone From Trading Option Credit Spreads
The pluses and minuses of credit spreads are not always discussed but should be.
Welcome to learning about credit spreads. With this class you will learn the importance of making adjustments and what may happen if you do not understand how to correctly handle your option positions. People tend to like the option spread that is called a "credit spread". We are going to take a good look at this type of spread today. There are teachers that think this is the best type of trade to do, but in reality, you do not know nor understand the high risk it can be. If it is traded all alone as an option spread, it can be very risky. This would mean that it is not being protected by another option trade.
In most cases the "credit spread" is the first spread you will learn. It is very simple to learn, but in the beginning you will not realize how dangerous this type of trade can be. You will find many teachers will teach this way of trading, since it is easy to learn and easy to sell, but they do not tell you the risk it can expose your account to. Teaching beginners how to trade "credit spreads" is a very good business, but if you trade "credit spreads" and nothing with it to protect your trade, you can lose a lot of money. Not only can you lose a lot of money, but it is a very stressful way to live. Let's see why.
It is known that an option trader can go into a "credit spread" with a 90% probability that he will make money. Most beginners believe in this trade, but if you turn your back to the other side of this picture, you may lose big. You need to understand what is happening while this trade is in play. People will not tell you about the high stress that is involved with just trading an option "credit spread."
There are times you can be behind in your trade the entire time you are in the trade, but the teachers will not tell you that. They do not talk about how they really feel, how worried they are, how difficult it is to sleep, all the way to the very last day, and praying for their stock to go up the next day. You are really putting at risk 90% of your money to make a small 10% profit. The truth is you may lose 90% with your first trade. No one tells you that with the "credit spread." A 90% probability does not mean you will make money nine times in a row and then lose one time. You may lose it all the first time. This does happen with beginning option traders.
How can this happen? The problem is that a "credit spread" is a very directional trade. It has Theta on its side, but it has Delta and Gamma working against it. For the little amount of Theta that you get, you are getting more danger with very high Gamma by trading this option spread. When the prices of the underlying changes, the profit and loss on the trade will also change very fast, this is why it is dangerous. This type of trade is more risky than most beginners trading options are aware of.
I would like you to know that there are many other types of trades that are a lot safer than the "credit spread." Now that you know how risky "credit spreads" can be please, learn how to combine them with other trades so they are protected and not so risky.
Article Source: FxTradingStock.com
About the Author
Take the step to learn more about low-risk Option Trading. Stop by San Jose Options Mentoring where you can find out all about Broken Wing Butterflies and Credit Spreads.
by: Johnny M Junior
Total views: 48
Word Count: 618
Date: Wed, 30 Jun 2010
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